Best Short Call of 2023 Belongs to Amateur ‘Dirty Bubble’ Sleuth | Most Read from Bloomberg Businessweek

The best short call of 2023 wasn't made by a ruthless hedge fund, a well-known activist firm, or any of the liveliest voices on the sell side. 

It was made by a first-year medical resident running a blog named after a SpongeBob SquarePants character

The Best Short Call of 2023 Belongs to the Amateur 'Dirty Bubble' Sleuth

by Sylvia Quarles

 

 January 19, 2024

 

in Finance

 

(Bloomberg) — The best short calls of 2023 weren't made by a ruthless hedge fund, a famous activist firm or any lively voice on the sell side. It was created by a first-year medical resident who runs a blog named after the SpongeBob SquarePants character.

Most read from Bloomberg

James Block is a physician at one of America's top hospitals, but between shifts he works as an amateur financial expert and writer. His personal mission: to expose the cryptocurrency market, which he describes as a “semi-decentralized pyramid scheme.”

• Many would dispute that characterization, and their quest is looking like an uphill battle following US approval of a spot bitcoin ETF this month. Yet the 31-year-old rookie has racked up notable wins — including last year's best meltdown call.
• Block (no relation to famous short seller Carson Block) reached out to Signature Bank during his investigation into the crypto world. The regional lender was doing large business with companies in the industry, working with a number of characters it considered shady and dealing with large exposures to suspicious digital assets.

“I saw how careless they were about who they were doing business with, how much money they had, how much uninsured deposits they had,” says Block from his home office near Ann Arbor, Michigan.

This prompted him to publish a scathing critique of Signature on his blog, Dirty Bubble Media, on January 10, 2023. The lender collapsed after a little more than two months, becoming the third-largest bank failure in U.S. history at the time. ,

• Signature's demise came amid a broader US banking crisis that began with Silicon Valley Bank, and given concerns surrounding the industry it was unlikely that Block was the only person who caused the problem. 
• But he was one of the few to publish concerns focused specifically on Signature, and the subsequent 100% drop in its shares made Dirty Bubble's bearish call the best of the year, according to Breakout Point, a Analytics firm that tracks short-selling campaigns.

This puts the block at the top of a list that also includes Nate Anderson's Hindenburg Research and Fraser Perring's Viceroy Research.

ftx takedown

With a subscriber base of around 20,000, the Dirty Bubble Media blog does not have the same influence as more well-known short sellers, who can often send stocks soaring as soon as they publish research. But Block's one-man campaign to “destroy these frauds” in the digital asset sector has attracted an influential readership, including hedge funds and even regulators, he says.

Many of them were won after helping Sam Bankman-Fried expose fraud at cryptocurrency exchange FTX and trading firm Alameda Research. The Dirty Bubble post “Is Alameda Research Bankrupt?”, in which Block patiently explained the ongoing potential scandal, was a viral hit in the days leading up to the collapse of both companies.

The name Dirty Bubble was taken from an antagonist from the SpongeBob TV show. Block says he chose this because he knew he was destined to be the bad guy in the eyes of crypto loyalists, and he was right. They have accused him of everything from lying to working for big Wall Street banks in an attempt to derail the digital asset. (“If it's true, I wish they'd send me a check,” he says.)

How right he is about the legality and integrity of the digital-asset space is debatable. While Bankman-Fried was convicted of one of the largest financial frauds of all time following the collapse of FTX and Alameda, and other high-profile crypto companies like Celsius Network have failed, advocates see these as key to an emerging industry. See it as inevitable growing pains.

In this view, the arrival of spot Bitcoin ETFs – long delayed by financial watchdogs due to concerns about market manipulation – signals growing regulatory acceptance and a shift into the mainstream. About a dozen such products began trading earlier this month, with about $4.6 billion of shares changing hands in their first session — a massive level of activity for the fund for the first time.

'Pyramid and Ponzi'

Block says he personally started betting against Signature with “pocket change” in 2022 based on his view of exposure to crypto and the uncertainty of the digital-asset ecosystem. 

• Ultimately, the lender failed not directly because of its cryptocurrency deals, but because panicked depositors began withdrawing billions following the demise of SVB and Silvergate Bank – two similarly crypto-friendly institutions.

It's impossible to say how many others saw increased risks. Many professional short sellers never publicize their positions or research, and hedge funds generally do not disclose their bets.

Meanwhile, measuring each call by calendar year can be a flawed process, as many calls can take months or years to complete. And predicting success from stock declines is imperfect, because in reality other factors will influence low sales returns, such as the cost of borrowing the stock.

Still, the block was the top call for 2023 out of 129 tracked by Breakout Point, the analytics firm said. Dirty Bubble was one of about a dozen new small-time workers counted last year.

Other calls by block have fared less well. 

• In March, Dirty Bubble published a report in which Coinbase Global, Inc. was described as a “cash-burning regulatory nightmare”. 
• In April, the blog explored the inherent problems in Charles Schwab Corp.'s business model. 
• Although shares of both companies have had a rough start to 2024, they are up more than 85% and 20%, respectively, since the posts appeared. ,

Block, now a second-year resident in psychiatry at the University of Michigan Hospital, sees the collapse of the entire crypto edifice – which he considers little more than a collection of “pyramids and Ponzi” – as inevitable. 

• Meanwhile, facing the current resurgence, he now sees his role as stemming madness rather than curing it.

“It sounds disappointing, but I recognize how impotent facts are in scenarios like this,” he says. 

“It doesn't really matter what is true and what is not true for people. “They only care about what will make them money.”

–With assistance from Philippe Lagercranser and Chris Miller.